The Complete Picture of Credit Default Swap Spreads - A Quantile Regression Approach

69 Pages Posted: 29 Apr 2008 Last revised: 31 Jan 2010

See all articles by Pedro Pires

Pedro Pires

Nova School of Business and Economics

João Pedro Pereira

Nova School of Business and Economics

Luis F. Martins

Pennsylvania State University - Department of Economics

Date Written: January 22, 2010

Abstract

We study the determinants of Credit Default Swap (CDS) spreads through quantile regressions. The results indicate that CDS spreads are strongly determined not only by traditional theoretical variables, such as the implied volatility and put skew, but also by illiquidity costs. However, contrary to stocks or bonds, we show that CDS transaction costs should be measured by absolute, rather than relative, bid-ask spreads. The quantile regressions reveal significant heterogeneity in the response of low-risk versus high-risk firms, with both the coefficients on the explanatory variables and the goodness-of-fit of the model increasing with the quantile of CDS premiums. The results obtained with a classical conditional mean regression, as used in most previous empirical studies, are very far from describing the centre of the CDS distribution, being more representative of the higher quantiles. These results are also helpful to understand the credit spread puzzle.

Keywords: Credit Default Swap, Quantile Regression, CDS Liquidity, Equity Options

JEL Classification: G12, G13, C14, C23

Suggested Citation

Pires, Pedro M. and Pereira, João Pedro S.S. and Martins, Luis F., The Complete Picture of Credit Default Swap Spreads - A Quantile Regression Approach (January 22, 2010). Available at SSRN: https://ssrn.com/abstract=1125265 or http://dx.doi.org/10.2139/ssrn.1125265

Pedro M. Pires

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

João Pedro S.S. Pereira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Luis F. Martins

Pennsylvania State University - Department of Economics ( email )

University Park, PA 16802
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,914
Abstract Views
7,527
rank
9,368
PlumX Metrics